Understanding the Role of Registered Investment Advisors (RIAs) in India
In a significant move for the investment advisory sector, Kamlesh Varshney, a full-time member of the Securities and Exchange Board of India (Sebi), recently addressed the Association of Registered Investment Advisors (ARIA) in Mumbai. He emphasized that registered investment advisors (RIAs) have the flexibility to offer a diverse range of financial products, even those not specifically regulated by Sebi. This means RIAs can charge fees or receive commissions for various services, expanding their operational scope considerably.
Fee Structure and Transparency in RIA Services
Varshney clarified that RIAs are not restricted by Sebi’s fee caps for these non-Sebi products. Furthermore, they are not required to channel such products through a separate entity, which had been a prior consideration by the regulatory body. However, this increased freedom comes with a responsibility: RIAs must clearly disclose fees for non-Sebi products as a distinct line item on their invoices.
Additionally, customers will need to sign a disclaimer or waiver indicating that they will not file complaints with Sebi regarding these non-regulated products. This disclosure aims to ensure transparency and strengthen the relationship between RIAs and their clients.
Encouraging Growth of RIAs in India
Varshney noted that the current number of active RIAs in India, which hovers around 500, needs to grow significantly to better serve the investment community. While he refrained from providing a specific target for this increase, the intention is clear: to foster a more robust advisory ecosystem.
Sebi’s Proposed Changes to Attract New RIAs
In an effort to encourage more professionals to pursue careers as RIAs and research analysts, Sebi has proposed several changes. Among these, they plan to lower eligibility criteria, eliminate net worth requirements, and ease regulations surrounding fees. The goal is to make it easier for individuals to enter this vital sector and provide a broader array of financial guidance and investment strategies.
Classification and Categories of Financial Products
During the interaction, Varshney outlined a classification system for financial products. He categorized them into three distinct baskets:
- Basket 1: Products regulated by Sebi
- Basket 2: Products under other regulatory bodies
- Basket 3: Unregulated products
This framework allows RIAs to offer products from all three baskets, providing comprehensive solutions to their clients. Such classifications ensure that investors are well-informed about the nature of the products they are engaging with, aligning expectations regarding regulatory support.
The Balance Between Regulation and Investor Access
Harsh Roongta, a Sebi RIA and member of ARIA’s advocacy committee, commented on the unique challenge Sebi faced. The regulatory body aimed to enable investors to access comprehensive financial planning and investment advisement while ensuring a clear understanding of the limitations regarding grievance redressal for non-Sebi products. By allowing RIAs to offer a broad spectrum of services while maintaining these disclosures, Sebi is striking a delicate balance that prioritizes investor interests.
Roongta added, “The approach of categorizing products will ensure that investors receive thorough solutions from a regulatory framework, even if certain products fall outside Sebi’s direct jurisdiction. Engaging with a regulated entity is decidedly more favorable than dealing with unregulated alternatives.”
Conclusion: A Positive Shift for Investors
Despite the numerous advancements, Varshney did not acquiesce to ARIA’s suggestion regarding the application of advice-based fees for assets under management (AUM) that are distributed through another entity or orphaned AUM requiring RIA advice. This remains a topic of discussion as the regulatory landscape evolves.
As the advisory landscape in India continues to mature, these developments highlight a crucial shift toward comprehensive financial guidance, enhanced regulatory clarity, and increased opportunities for both RIAs and investors alike.
